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Liquidity Regulation and Bank Lending

Foly Ananou, Dimitris Chronopoulos, Amine Tarazi and John Wilson
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Foly Ananou: LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges
Dimitris Chronopoulos: University of St Andrews, Centre for Responsible Banking & Finance, Gateway Building, St Andrews, Fife KY16 9RJ, UK

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Abstract: Bank liquidity shortages during the global financial crisis of 2007-2009 led to the introduction of liquidity regulations, the impact of which has attracted the attention of academics and policymakers. In this paper, we investigate the impact of liquidity regulation on bank lending. As a setting, we use the Netherlands, where a Liquidity Balance Rule (LBR) was introduced in 2003. The LBR was imposed on Dutch banks only and did not apply to other banks operating elsewhere within the Eurozone. Using this differential regulatory treatment to overcome identification concerns and a difference-indifferences approach, we find that the LBR increased the volume of lending by Dutch banks relative to other banks located in the Eurozone. Increased equity, an inflow of retail deposits and subsequent increase in balance sheet size allowed Dutch banks to increase lending despite having to meet the LBR requirements. The LBR also affected loan composition (with corporate and retail lending increasing more than mortgage lending) and the maturity profile of loan portfolios. Our results have relevance for policymakers tasked with monitoring the impact of liquidity regulations on banks and the real economy.

Keywords: Liquidity Coverage Ratio; Propensity Score Matching; Quasi-natural experiment; Liquidity Regulation; Liquidity Balance Rule; Basel III; Bank Lending (search for similar items in EconPapers)
Date: 2021-06-14
New Economics Papers: this item is included in nep-ban
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Journal Article: Liquidity regulation and bank lending (2021) Downloads
Working Paper: Liquidity Regulation and Bank Lending (2021)
Working Paper: Liquidity Regulation and Bank Lending (2020) Downloads
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